Triple Screen begins by analyzing the long-term chart, one order of magnitude greater than the one you plan to trade. Most traders pay attention only to the daily charts, with everybody watching the same few months of data. If you begin by analyzing weekly charts, your perspective will be five times greater than that of your competitors.
The first screen of Triple Screen uses trend-following indicators to identify long-term trends. The original system uses the slope of weekly MACD-Histogram (see Section 26) to identify the market tide. The slope is defined as the relationship between the two latest bars. When the slope is up, it shows that bulls are in control—it is time to trade from the long side. When the slope is down, it shows that bears are in control and tells you to trade only from the short side (Figure 43-1).
A single uptick or a downtick of weekly MACD-Histogram indicates a change of a trend. The upturns that occur below the centerline give better buy signals than those above the centerline (See "Indicator Seasons" in Section 36). The downturns that occur above the centerline give better sell signals than the downturns below the centerline.
Some traders use other indicators to identify major trends. Steve Notis wrote an article in Futures magazine showing how he used the Directional System as the first screen of Triple Screen. Even a simpler tool, such as the
Rising Falling buy t sell'
Feb Mar Apr Nay Jun Jul Bug Sep Oct Nov
409.6 393.5 377.5 361.4 345.3 2.8826 0.9004 -0.2817 -1.4639 -2.6460
Figure 43-1. Weekly MACD-Histogram—The First Screen of Triple Screen
The slope of MACD-Histogram is defined by the relationship between its two latest bars (see inset). Triple Screen tells traders to examine weekly charts before looking at the dailies. When the weekly trend is up, it allows us to trade only from the long side or stand aside. When the weekly trend is falling, it allows us only to trade from the short side or stand aside.
Weekly MACD-Histogram gives a buy signal when its slope turns up. The best buy signals are given when this indicator turns up below its centerline. When MACD-Histogram turns down, it gives a sell signal. The best sell signals are given when it turns down from above its centerline (see "Indicator Seasons," Section 36). Once you find the trend of the weekly MACD-Histogram, turn to daily charts and look for trades in the same direction.
slope of a 13-week exponential moving average, can serve as the first screen of the Triple Screen trading system. The principle is the same. You can use most trend-following indicators, as long as you analyze the trend on the weekly charts first and then look for trades on the daily charts only in that direction.
Screen One: Identify the weekly trend using a trend-following indicator and trade only in its direction.
A trader has three choices: buy, sell, or stand aside. The first screen of the Triple Screen trading system takes away one of those choices. It acts as a censor who permits you only to buy or stand aside during major uptrends. It allows you only to sell short or stand aside during major downtrends. You have to swim with the tide or stay out of the water.
Second Screen—Market Wave
The second screen identifies the wave that goes against the tide. When the weekly trend is up, daily declines point to buying opportunities. When the weekly trend is down, daily rallies point to shorting opportunities.
The second screen applies oscillators to the daily charts in order to identify deviations from the weekly trend. Oscillators give buy signals when markets decline and sell signals when markets rise. The second screen of the Triple Screen trading system allows you to take only those daily signals that point in the direction of the weekly trend.
Screen Two: Apply an oscillator to a daily chart. Use daily declines during weekly uptrends to find buying opportunities and daily rallies during weekly downtrends to find shorting opportunities.
When the weekly trend is up, Triple Screen takes only buy signals from daily oscillators and ignores their sell signals. When the weekly trend is down, Triple Screen takes only shorting signals from oscillators and ignores their buy signals. Force Index and Elder-ray are good oscillators to use with Triple Screen, but Stochastic and Williams %R also perform well.
When the weekly MACD-Histogram rises, the 2-day EMA of Force Index (see Chapter 8) gives buy signals when it falls below its centerline, as long as it does not fall to a new multiweek low. When the weekly MACD-Histogram declines, Force Index gives shorting signals when it rallies above its centerline, as long as it does not rise to a new multiweek high (Figure 43-2).
When the weekly trend is up, daily Elder-ray (see Section 41) gives a buy signal when Bear Power declines below zero and then ticks back up toward
378.fi 378.3 3(2.9 353.6 345.3 967.1 516.9 66.6 -383.6 -833.8
Figure 43-2. Daily Force Index—The Second Screen of Triple Screen
The 2-day EMA of Force Index is one of several oscillators that can work as the second screen of the Triple Screen trading system. Force Index marks buying opportunities when it falls below its centerline. It marks selling opportunities when it rallies above its centerline.
When the weekly trend is up, take only buy signals from the daily oscillator for entering long positions. When the weekly trend is down, take only sell signals for entering short positions. At the right edge of the chart, the weekly trend has turned down. Wait for a rise in Force Index in order to sell short.
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E2WklyMACDsell □ Wkly MACD buy
"Hov the centerline. When the weekly trend is down, daily Elder-ray signals to go short when Bull Power rallies above zero and then ticks back down.
Stochastic (see Section 30) gives trading signals when its lines enter a buy or a sell zone. When weekly MACD-Histogram rises but daily Stochastic falls below 30, it identifies an oversold area, a buying opportunity. When the weekly MACD-Histogram declines but daily Stochastic rises above 70, it identifies an overbought area, a shorting opportunity.
Williams %R (see Section 29) needs a 4- or 5-day window to work with Triple Screen. It is interpreted similarly to Stochastic. The Relative Strength
Index does not react to price changes as fast as other oscillators. It helps with overall market analysis, but is too slow for Triple Screen.
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